Thursday, January 24, 2008

On Sennholz

So, Ron Paul's economic theory is of the Austrian school. Paul credits Hans Sennholz both for inspiring his enthusiasm and influencing his economic theory. Sennholz has passed, but his writings live on: was he legit? Let's see...

In July of 2000, Hans notes the potential danger of derivatives based on mortgages:

Fair enough. He predicted the 2007 crisis right before the 2001 crisis. Right reason, wrong readjustment. What did Sennholz have to offer more recently? Well, in Feb of 2006, he gets is almost exactly right:

So, we have a dog and a tail: monetary policy and the business cycle. But which is dog and which is tail? Does the Fed create the business cycle by over-inflating the economy until it breaks under the pressure and readjusts and the cycle continues? Or does the business direct the Fed to make what attempts it can to smooth out an exogenous boom-bust process?

Sennholz, Paul and their ilk think that the dog is chasing it's tail: using a sub-market lending rate to inflate the economy is the problem, not the solution. It's an argument that makes sense, but someone's being left out. Even if the Fed put the gun in our hands, it didn't pull the trigger. Someone had to be buying all those houses, brokering all those mortgages, and investing in all those derivatives. Sure all that money has to go somewhere, but sometimes a bad investment is just a bad investment.